Economics- The Market Economy/ The consumer

Utility

Refers to the benefit an individual gets from consuming a good/service. measured in utils.

Total utility

Refers to the total benefit that an individual gets from consuming a good/service

marginal utility

refers to the extra benefit that an individual gets from consuming an extra unit of a good/service.

Consumer sentiment

A mathematical measure of health of the economy as indicated by consumer opinion.

Rational consumer

a logical/reasonable consumer, makes purchasing desicion’s with intelligence rather than emotion.

Economic good

gives utility, is transferable and scarce relative to demand for it.

Law of diminishing marginal utility

states that if a consumer consumes more units of a good, the extra satisfaction or marginal utility derived from each additional good consumed will eventually decline.

Assumptions underlying consumer behavior

• consumers have limited income

• consumers must make choices on how best to spend

• consumers are assumed to be rational

Impulse purchase

A purchase made in the spur of the moment

why do consumers sometimes behave irrationally?

• emotions

• senses

An economic good must

• give utility

• be transferable

• relatively scarce

Assumptions underlying the LDMU

• does not apply to medical goods

• does not apply to addictive goods

• only applies after a certain amount of time has occured

• the income of the consumer has changed.

The law of equi marginal returns

The equi marginal principle of a consumer states that if a consumer wants to maximise utility they will allocate their income to that the ratio of marginal utility to the price is the same.

Price elasticity of demand (PED)

measures the percentage change in the quantity demanded of a good/service as a result of a percentage change in the price.

Relatively elastic demand

If the percentage change in price is outweighed by the quantity demanded. ex. luxury goods

Relatively inelastic demand

If the percentage change in price outweighs the percentage change in quantity demanded. ex. taxed goods, fuel and tabacco

High PED good

something you care about the price of

Low PED

A good you are not too fussed about

Unitary elastic demand

If the percentage change in quantity demanded is equal to the percentage change in price

Perfectly elastic demand

If demand falls to 0 if there is a rise in price

Perfectly Inelastic demand

No change in the quantity demanded when there is a price change. ex. essential medical goods